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Strategies for Market Makers
Setting the initial market: 1. Take your expected fair market value into account when creating your initial market. * Example: If your expected fair market value is 89, you may set an initial bid price below 89 and your initial offer price above 89. If your spread is set at $5, your market could be set at $87 to $92. The Market Maker’s initial offers will provide an indication of whether his/her Inside Info card value is above or below average. Use this information to adjust your total expected value accordingly. * Advanced: Keep in mind that Traders will be adjusting their expected fair market value based on the initial bid-offer spread. If you set a high market, Traders may assume you have a high Inside Info card and adjust their expected fair market value up. An advanced strategy is to take advantage of this action; by setting a market higher than your own expected fair market value (and convincing Traders that your Inside Info card is higher than it actually is), you may encourage Traders to buy securities from you at a higher than expected price. 2. Clearly articulate your initial bid and offer price is. Doing so will eliminate confusion and make it easier for both you and the Market Maker to record your transactions. * Example: “I’m setting the initial bid price at $98 and the initial offer price at $103.” 3. After setting the market, the first Trader who puts in an order gets the transaction. 4. Record all of your transactions in your Profit & Loss Worksheet. 5. After each transaction (or if no offers are made at the current market prices), you can adjust the bid and offer prices. Make sure that each time an adjustment is made, the spread (in the above example, $5) remains the same. Adjusting the market: 6. If a Trader sells to you, this is an indication that this player thinks the value of your market is too high (based on the value of the card he/she is holding). After the transaction is complete, you may consider adjusting your bid and offer prices down. 7. If a Trader buys from you, this is an indication that this player thinks the value of your market is too low (based on the value of the card he/she is holding). After the transaction is complete, you may consider adjusting your bid and offer prices up. 8. When some Traders are buying while other Traders are selling, little to no market adjustments are necessary as you can use the spread to earn profits. When activity is only occurring on one side of the spread (i.e., all Traders are buying or all Traders are selling), you may have to aggressively adjust the market to minimize your risk. Since you are able to adjust the market after every trade, doing so will give you a better sense of the overall market. 9. Clearly articulate your market changes after each transaction. Doing so will eliminate confusion and make it easier for both you and the Market Maker to record your transactions. * Example: “I’m setting a new initial bid price at $100 and a new offer price at $105..”